Here’s How to Avoid
Malaysia Taxes (Legally!)

There’s a big difference between tax evasion and tax avoidance, and it’s that the latter is COMPLETELY LEGAL.

Tax avoidance basically means making use of legal strategies to minimise the amount of tax you owe. This can include taking advantage of tax deductions, credits, and other incentives that the government provides.

Tax avoidance can be a tricky thing though. While it’s legal, a solid understanding of tax laws and regulations is required to ensure compliance. You wouldn’t want to end up on the wrong side of Malaysian laws.

There are several ways to go about avoiding or reducing your tax liabilities in Malaysia. 

Depending on your business structure and industry, here are just some of the legal strategies you can leverage. 

1. Make sure you register for the right business type.

Different business types can have different tax rates and benefits based on Inland Revenue Board of Malaysia (IRBM/LHDN) guidelines.

• Private or Public Companies: This business type is a popular choice because they are separate legal entities from their owners. Private companies are common among small and medium-sized businesses, while public companies are listed on the stock exchange. Both types of companies are taxed at corporate rates, generally 24%, but small companies with lower income (paid-up capital of RM2.5 million or less and gross income not exceeding RM50 million) may qualify for reduced rates.
• Partnerships: A partnership involves two or more people or entities running a business together. The profits or losses of the business are shared among the partners, who then pay taxes on their individual income. The individual income tax rates for Assessment Year 2023 vary depending on the chargeable income. The maximum rate is 30% for chargeable income exceeding RM 2,000,000.
• Sole Proprietorships: A sole proprietorship is owned and operated by one person. The business income is treated as personal income, meaning the owner pays taxes as an individual. Like partnerships, there’s no legal distinction between the business and the owner.
• Limited Liability Partnerships (LLPs): LLPs offer the benefits of both partnerships and companies by providing limited liability protection to the partners. LLPs are taxed like companies, generally at corporate rates, but small LLPs with lower income may qualify for reduced rates.
• Labuan Companies: Labuan companies are based in the Federal Territory of Labuan and are often used for offshore activities. They enjoy special tax rates under the Labuan Business Activity Tax Act 1990, typically at 3% of profits. Some Labuan companies may even be exempt from Malaysian income tax if they engage in non-trading activities, like holding investments.
• Real Estate Investment Trusts (REITs): REITs are investment vehicles that focus on income-generating real estate, like commercial properties. If they distribute 90% or more of their income to investors, they enjoy tax exemptions. To qualify, REITs must be approved and listed on the Malaysian stock exchange.

Each of these business types has its own set of tax implications and legal considerations. So try to check which categories your business can fit into and register under the structure that offers the best tax advantages for your operations.

2. Claim all possible tax deductions.

Several business-related expenses can count towards tax deductions so you don’t want to be stingy when it comes to listing out all your expenses. As long as they are legitimate and directly related to your business operations, these expenses can help reduce your taxable income.

Some of the expenses you can claim against your business taxes include:

• Business Operating Expenses: Everyday expenses necessary for running your business, such as office supplies, utilities, and rent, can be deducted. For example, costs related to maintaining or repairing equipment, machinery, and property used in the business are deductible.
• Salaries and Wages: The wages, salaries, and benefits paid to employees are generally deductible. This includes overtime payments, commissions, and bonuses. Additionally, businesses can claim double deductions for wages paid to disabled employees, senior citizens above 60, and certain other eligible groups.
• Start-up Costs: Expenses incurred while setting up your business, such as incorporation fees and initial advertising, can be claimed as deductions.
• Rent Expenses: If your business rents office space, manufacturing facilities, or retail space, the rent you pay can be deducted from your taxable income.
• Professional Development: Costs associated with training and upskilling your employees are deductible. This includes fees for courses, workshops, and conferences that help improve your business operations.
• Interest Expenses: Interest paid on loans taken for business purposes, such as purchasing equipment or property, is deductible.
• Home Office Expenses: If you run your business from home, you can deduct a portion of your home expenses, like utilities and internet, that are used for business purposes.
• Travel Expenses: Business-related travel costs, such as transportation and accommodation, are deductible, provided they meet certain criteria set by the Inland Revenue Board.
• Insurance Premiums: Premiums paid for business-related insurance, such as property or liability insurance, can be claimed as deductions.

For individual income taxes, the deductions can differ depending on several factors, such as your income level, family status, and specific expenses incurred throughout the year. Some of the tax reliefs for individual income tax according to LHDN include medical treatment, education fees, child-related expenses, life insurance and EPF contributions, and so on.

If you’re not sure which expenses to claim, it’s essential to review the various categories of allowable deductions. Consulting a tax professional can also provide valuable insights and assistance in navigating this area.

3. Take advantage of company tax incentives.

Another smart strategy for legally reducing tax liabilities in Malaysia is taking advantage of company tax incentives.

Not many know it but the Malaysian government offers various tax incentives and exemption schemes designed to encourage business growth and investment in specific sectors.

For instance, businesses that qualify for Pioneer Status can enjoy significant tax holidays of up to ten years. This status allows companies to pay tax on only 30% of their statutory income during the exemption period, starting from the day their production levels reach at least 30% of capacity.

The Investment Tax Allowance (ITA) provides another pathway for tax relief. Companies can apply for an allowance of 60% on qualifying capital expenditures, such as machinery and equipment, incurred within five years. This allowance can be offset against 70% of the company’s statutory income, allowing businesses to reduce their taxable income significantly. Any unutilized allowance can be carried forward to future years until fully utilized.

To qualify, businesses must apply to the Malaysian Investment Development Authority (MIDA) and meet specific criteria related to technology usage, value addition, and industrial linkages.

4. Consider donating to a charity.

Donating to a charity you support won’t only benefit the causes you care about, but it can also provide a significant tax advantage.

Under the Income Tax Act, both individuals and corporations can deduct charitable donations from their gross income, which can help lower their overall tax liability. However, it’s important to note that while charitable contributions are beneficial, the total amount you can claim as a deduction is limited to 10% of your gross income.

To take advantage of this deduction, ensure that the charity you donate to is registered with the Malaysian government and recognized as a legitimate charitable organization. Donations can include cash contributions, gifts in kind, and even certain types of volunteer work, though the latter may not directly translate into a deduction.

When you donate, keep all receipts and documentation, as you will need these for your tax return. This not only helps you track your contributions but also provides proof in case of any queries from the tax authorities.